Fund-based and non-fund based credit limits

With 69% of small to medium businesses stating cash flow related needs as their reason for requiring business finance, it’s no surprise many business owners want to know exactly what financing options are available to them. 

Two of the types of funding that could help with cash flow are fund-based and non-fund-based credit limits. While fund-based credit is a physical fund, non-fund-based credit is guaranteed by assurance. Here’s what they are, the benefits and drawbacks of each, and how you can decide for yourself which solution you’d like to choose. 

What is a fund-based credit limit?

Fund-based credit limits are financial products that a bank or lender will give that allows businesses to physically draw funds out of their accounts. Fund-based working capital includes funding such as:

• Short term business loans

• Cash credit or business overdrafts

• Term loans for fixed assets

• Working capital loan 

Businesses typically use fund-based credit limits to gain quicker access to cash to help address things like cash flow problems or stock.  

What are the benefits of a fund-based credit limit?

A fund-based credit limit can be a helpful way to manage your daily operations and invest in growth. Here are some of the benefits. 

Access to cash now

If a lender determines you are eligible and you get approved, you could be granted access to the cash you need to grow and manage your business now. 

Manage cash flow 

You can then use this cash to manage your cash flow, maintain steady working capital, meet your payroll obligations and purchase inventory. 

Flexible options 

There are a range of fund-based credit line types available, each suited to a specific need. Whether you’re looking for a lump sum of money to fix a broken piece of essential equipment, or an overdraft facility to address immediate cash flow needs, a fund-based credit facility could be the solution you’re looking for. 

What are some potential drawbacks of a fund-based credit limit?

Fund-based credit can be more expensive than non-fund-based credit, as you’ll be charged interest and potentially even fees by the lender. You also usually have to start repaying the instalments fairly quickly, meaning you could have a new strain on cash flow from early on.  

What is a non-fund-based credit limit?

Non-fund-based finance isn’t a physical form of funding but more of a promise of financial support compared to actual funds. Non-based-credit limits include:

• A bank guarantee

• A letter of credit

A bank guarantee is a guarantee from lenders that ensures the debtor will be able to repay the debt. If they can’t settle it, the bank covers it. A letter of credit is a legal document a bank can present that outlines payment will be made back by the business.

A non-fund-based credit limit allows businesses to use funds to help grow and develop their business without physical finance. The guarantee still lets a business buy equipment or draw down loans and expand activity without having to handle the funds. 

What are the benefits of a non-fund based credit limit?

Non-fund-based credit limits come with a variety of benefits. Here are just a few.  

Reduced risk 

Borrowing outright tends to carry more risk than non-fund-based credit, which only requires payment if a specific event occurs, for example, in the case of a default. 

No immediate payment 

There is no immediate need to pay instalments with the addition of interest. This can give some businesses more space to breathe in those early days. 

Build a relationship with a lender 

It’s possible you could use a non-fund-based credit line to encourage the building of a relationship with a bank or credit provider. Over time, the lender may feel more comfortable working with your business and they may be open to extending fund-based credit limits when needed. 

What are some potential drawbacks of a non-fund-based credit limit?

You do not receive funds directly with non-fund-based credit, which means you will not have immediate access to the cash you may want for working capital or to power growth. A non-fund-based limit also creates the potential for a possible future payment liability, which could cause a strain if triggered. 

What’s the difference between a fund-based credit limit and non-fund-based credit limit?

A fund-based credit limit is physical access to capital, whereas a non-fund-based limit is a promise or guarantee given to a third party, which can help encourage trade without taking on the risk of cash flow strain. Essentially, one is cash today, the other is a promise. 

Which option might suit your business better?

Only you can truly decide which option suits your business better, but here are some questions you could ask yourself to help you decide: 

• Do you need access to capital in the short term? 

• Is the capital needed to pay for an essential piece of technology, meet payroll obligations, or power growth? 

• Do you want to repay that cash in monthly installments?

• Will you be able to repay the extended credit even if the market takes a dip or you lose a client? 

If your answers to the above questions are yes, you may be interested in a fund-based limit. Alternatively: 

• Do you work in construction or in importing and exporting? 

• Are you hoping to secure larger contracts or expand into new geographies? 

• Do you need to facilitate a transaction where a promise or guarantee could help the transaction go ahead, but you don’t actually need the cash to hand? 

• Are you bidding on a large project that requires a guarantee? 

• Is a client or supplier asking you for a guarantee from a bank to help them feel more comfortable to go ahead with a deal? 

• Do you want to ensure you have a line of credit ready on standby for future use, but you don’t need the money right now? 

If you’ve answered yes to the above questions, a non-fund-based limit may be more suitable. 

Find a line of credit with Funding Options by Tide

Whether you’re looking for fund-based or non-fund-based lines of credit, we’re here to help you find out if you’re eligible without needing to query a hundred different lenders all on your own. 

We’re a business finance broker, which means we work to help eligible limited companies and sole traders access up to £20M from our network of over 120 lenders. Just click the link below and submit your information to find out if you could get a line of credit with an established lender in the UK. 

Find a line of credit.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.